Your family company bought a new commercial property with a view to expanding the business. The bank insisted on the family shareholders providing personal sureties for the financing afforded to the business to buy the property. Without hesitation, the sureties were provided as business was looking up and the property was needed. Then the recession hit, and to avoid foreclosure by the bank your company was placed under business rescue. But now the bank is coming after you as surety despite the company being placed under business rescue. Can they do this?

Business rescue was introduced by the Companies Act 71 of 2008 (“the Act”) which came into operation in May 2011. It is a relatively new concept with many of the nuances of the process still being developed and refined by our courts. In this article we will look at the effect of business rescue proceedings on a company and whether creditors may pursue sureties whilst the company is under business rescue.

The aim of business rescue proceedings is to allow a company breathing space by placing a moratorium on the institution of legal proceedings against a company and to allow the appointed business rescue practitioner to ‘rescue’ the company by designing and implementing a business rescue plan. A company can be placed under business rescue generally by way of a resolution adopted by the board of directors of the company or, alternatively through a successful application to the High Court by an affected person.

The Act provides that once a company is placed under business rescue a moratorium (bar) is placed upon creditors from instituting action against a company. The question that has been the subject of much litigation over the last few years is whether a creditor may institute and continue with legal steps against the surety of the debtor company whilst the debtor company is under business rescue. A surety in its ordinary meaning is either an individual or an entity that binds itself as surety and co-principal debtor for the liabilities of a debtor company.

The Act provides that where a company is placed under business rescue and the company has bound itself as surety or provided a guarantee, no legal proceedings may be instituted against the company in respect of such surety or guarantee without leave of the Court. However the Act is silent on whether a creditor may institute legal proceedings against the surety of a debtor company that is placed under business rescue.

The last mentioned situation was considered in a number of judgments which we will briefly highlight. In the matter of Investec Bank LTD v Bruyns 2012 (5) SA 430 (WCC) the creditor was of the view that the moratorium that exists in favour of the company whilst under business rescue does not extend to the surety, but only to the company itself. It was argued that the business rescue defence was a personal defence for the benefit of the company only. The surety however argued the contrary and maintained that the defence was a defence in law which extended to the surety as well. The Court however ruled in favour of the creditor with the Court reasoning that the defence provided by the Act was only for the Company, and does not extend to the surety as it is a personal defence and not a defence in law.

In a more recent judgment of Tuning Fork (Pty) Ltd t/a Balanced Audio v Greeff and another (2014) 3 ALL SA 500 (WCC), the Court found in favour of the surety and not the creditor. However, it is important to take note that unlike the previous judgment the facts were not similar. In this matter the Court was not called upon to make a finding of whether the moratorium extends to a surety or not. The Court was called upon to decide whether when a creditor accepts a payment in full and final settlement at a meeting of creditors and in terms of an approved business rescue plan, the creditor may still thereafter proceed with steps against the surety. The Judge, who was the same Judge as in the Investec case, concluded that under those circumstances the creditor may not proceed against the surety especially when the deed of suretyship was silent on those circumstances. The deed of surety was silent on whether a creditor was entitled to proceed against a surety notwithstanding the fact that the creditor reached a compromise with the principal debtor. The Court determined that the obligation of a surety is accessory in nature and accordingly the extinction of the principal obligation extinguishes the obligation of the surety. The creditor, by reaching a compromise in full and final settlement with the company in terms of an approved business rescue plan, accordingly extinguished the obligation of the surety.

What is important to note of the above mentioned case law is the Court’s remark that the deed of suretyship was silent on certain aspects such as what must happen when a debtor company under business rescue reaches a compromise with the creditor in a business rescue plan, and the compromise is less than the actual debt. Should the deed of suretyship also stipulate that the surety should remain liable despite any such compromise then the creditor ought to be entitled to proceed against such surety despite the compromise.

Our courts have thus established (for now) that a creditor may proceed with steps against a surety of a debtor company in business rescue at the commencement of the business rescue proceedings whilst the company enjoys protection. Furthermore the creditor may not proceed against the surety of a debtor company in business rescue after the adoption of a business rescue plan which provides for the discharge of the principal debt, unless the deed of surety stipulates otherwise.

It is important that the provisions in a deed of surety should be clear and deal also with the situation of business rescue, as it may well be to the detriment of a creditor should the deed of surety (and the business rescue plan) be silent on these aspects. Request the advice of a legal practitioner to ensure that your deed of surety provides for the consequences of any business rescue proceedings.

Written by Lucian Companie, Director, Phatshoane Henney Attorneys: Litigation Department